Welcome back to the second article in our Retirement Planning Series, “These Can Be Fatal To Your Retirement!”

Last quarter, we discussed how ignoring the “Sequence Of Returns” (SOR) during your retirement planning can be fatal to both your portfolio and retirement! (If you haven’t read the article yet, make sure you do!  It’s extremely beneficial!)

In review, the SOR article taught us that suffering portfolio losses early in your retirement can be fatal. When constructing your retirement portfolio, it’s not just about knowing the historic annual average returns of your investments. You need to consider your age and stage of life as well as the current position of the markets.

If you’re nearing retirement and the markets are historically high, it’s more likely that there will be future losses in the markets early in your retirement. History has proven that highs don’t last forever. That is the time when you should be considering portfolio adjustments that protect your lifestyle.

This quarter, we are going to discuss the impact of portfolio losses and a strategy you can use in your portfolio to avoid them. To use an example portfolio of one million dollars that spans 18 years, we have a scenario where during the period between 2000 and 2017, the S & P 500 suffered only four losing years while providing 14 winning years!

One would think that with only four losing years vs. 14 winning years, your money would have performed great! However, when you dig a little deeper, the fear of running out of money that so many retirees have, is real. The $1,000,000 invested in the S & P 500 had provided $900,000 in income withdrawals.  Yet, the value had declined all the way down to $396,125.39.

Another example portfolio where a defensive strategy known as the “50% Participation Rate” (PR50) is used shows results that are very different. With this strategy, negative returns are replaced with 0% returns. So, when the S & P 500 loses, you earn 0% instead of suffering the negative returns. When the S & P 500 is positive, you earn 50% of the price returns.

In other words, you don’t earn 100% of the gains, nor do you experience any of the losses. In fact, once you earn gains, they are automatically and annually locked in and can’t be lost during negative market performance. Initially, it doesn’t sound like this type of strategy would perform that well, but the numbers don’t lie. The same $1,000,000 invested back in 2000 using the PR50, provides the same $900,000 in income withdrawals, but is worth $821,216.94! That’s a difference in value of $425,091.55!

When you’re younger, working, earning income and investing, losses are not as critical. When you’re at retirement, losses can be fatal and must be planned for and eliminated.  You don’t need all the gains if you don’t suffer the losses.

Here Are Five Portfolio Adjustments That You Should Consider Implementing Into Your Retirement Plan While The Markets Are High: 

  1. Factor the “Sequence Of Returns” into your retirement plan.
  2. Redesign your portfolio from a “working years portfolio” to a “retirement years portfolio.”
  3. Make sure that the income streams you’ll need to live your lifestyle are secure, so even if there are market declines, you’re still able to live your retirement according to your plan.
  4. Make sure the core portion of your portfolio is secure to eliminate unnecessary market losses.
  5. Eliminate unnecessary fees from your portfolio. Fees can be just as bad as losses.

If you’re nearing or already in retirement, avoiding losses becomes more important than chasing returns.  It’s the stage of life where protecting what you’ve worked so hard and so long for that matters most!  Retire with certainty!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which products/investment(s) may be appropriate for you, consult with your attorney, accountant, financial advisor or tax advisor prior to investing or taking action.

About the author

Richard Kelly - Certified Senior Advisor in Monument, Colorado
Rick Kelly
Certified Senior Advisor at 800-975-1064

Rick Kelly, CSA is an Independent Certified Senior Advisor with offices in Monument and Littleton, CO.  He helps Boomers and Retirees live healthier retirements by designing safer and more optimal portfolios along with secure retirement income streams.

Rick Kelly, CSA
325 2nd Street, Suite I
Monument, CO 80132